Standing Committee A

[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 207 - Individual's lifetime allowance and

George Osborne: I beg to move amendment No. 416, in
clause 207, page 173, line 32, after 'year', insert 
 'increased by the percentage increase (if any) in national average earnings over that tax year'.

John McWilliam: With this it will be convenient to discuss the following amendments:
 No. 418, in 
clause 217, page 183, line 4, after 'year', insert 
 'increased by the percentage increase (if any) in national average earnings over that tax year'.
 No. 381, in 
schedule 34, page 468, line 2, leave out 'retail prices index' and insert 'national average earnings'.
 No. 385, in 
schedule 34, page 471, line 5, leave out 'retail prices index' and insert 'national average earnings'.

George Osborne: I am sorry that the Government do not have much enthusiasm for getting their own business through, but we will crack on.

John McWilliam: Order. I thought that the delay in our being quorate was due to the fact that Members from all parties had been working so hard, it being Treasury questions today.

George Osborne: The Financial Secretary was working harder than most. She announced a U-turn on stakeholder pension charges and conceded that the Government had made a submission to the parliamentary ombudsman on Equitable Life.

John McWilliam: Order. I fail to see what that has to do with the amendments.

George Osborne: Not a lot, Mr. McWilliam.
 I shall deal first with amendments Nos. 416 and 418, both of which attempt to place in the Bill a clear mechanism by which the value of the lifetime and annual allowances can be increased. The Government indicate in the explanatory notes by how much the allowances will increase in the first years after A-day. We had a debate before lunch about including those amounts in the Bill, but the Opposition were defeated in a Division. As a result, all the clause contains is a statement that the lifetime allowance for each year 
''is specified by order made by the Treasury.''
 The same is true for the annual allowance in clause 217. 
 The Bill does not go nearly as far as the Inland Revenue did in its consultation document or in the Budget note, which was, of course, introduced on Budget day. The Inland Revenue said in the note that the lifetime allowance would be reviewed quinquennially, but that statement is not repeated in the Bill or in the explanatory notes, although the Financial Secretary mentioned it in her speech this morning. Perhaps she can explain why it is not in the Bill, where it should be, or in the explanatory notes. Will there be just a single quinquennial review or will the process be ongoing; that is, will there be one every five years? How will the review be conducted? Will it be internal or external? Will the National Audit Office again be asked to conduct it? Will the review welcome submissions from outside bodies, perhaps even the Government Actuary's Department? Perhaps the Financial Secretary could answer those questions. 
 Could the Financial Secretary also explain—this comes to the thrust of the amendments—what happened to the commitment in paragraph 1.34 on page 9 of the December 2003 consultation document annually to increase the lifetime and annual allowances by the retail prices index? The document stated that 
''the lifetime and annual allowances will be uprated annually by RPI. The lifetime allowance will be rounded up to the nearest £10,000 and the annual allowance up to the nearest £1,000.''
 There is nothing about that in the Bill. 
 RPI can be found in other parts of the Bill as a mechanism for judging and increasing things. I will touch on that when I discuss the other two amendments in this group, but there is nothing in the clauses on the lifetime allowance or the annual allowance about operating them with prices. That seems a bit strange, not least because the Government had ignored their own suggestion in the consultation document. The upratings that they announced, for the lifetime allowance at least, vary for the first four years between about 2.9 and 6.6 per cent. I am not complaining about those generous increases; I am just pointing out that the only evidence the Treasury has given us about the future direction of the lifetime and annual allowances is that they will be increased by very much more than RPI. 
 What has happened to the December 2003 commitment to increase allowances by RPI? Should there not be a mechanism in the Bill to increase allowances not by prices, nor by the arbitrary whim of the Chancellor of the day, but by earnings? The Financial Secretary will say that the earnings cap has increased by RPI since 1989, but that does not necessarily make it right to continue the policy with the lifetime allowance and the annual allowance. After all, pensions are about earnings in retirement; pension contributions are often made as a percentage of earnings; and final salary schemes by definition increase the benefits paid out as someone's earnings increase. Therefore, logically, the lifetime allowance and the annual allowance should increase with earnings as well. 
 The Government seem to have accepted that logic. I tabled the amendment and then realised that the Government have accepted the logic because they 
 announced that in some of the first four or five years allowances will increase by more than earnings. However, because of the statement in the consultation document, there is a nervousness that if, God forbid, this Government were still in power after four or five years they would revert to increasing them by prices. The relative value of the lifetime allowance and the annual allowance would steadily erode, which would mean that the value of tax-privileged pension savings that people can accumulate would also steadily erode. That is no way to encourage saving. 
 The Financial Secretary or the Chancellor of the Exchequer, whoever it was who made the decision, seems to have accepted the logic of the amendments anyway, because in the first few years after A-day, the allowances will increase by considerably more than RPI in every year—in some years by almost treble RPI. That is good, but the principle is the important thing. There should be a mechanism in the Bill so that people can plan for their retirement with confidence, knowing how things will develop over a longer period, rather than each year hanging on the announcement of the Chancellor of the day about the uprating of the two allowances.

John McWilliam: Order. Gentleman may remove jackets. For those who have already removed them, I will not insist on them putting them back on.

Rob Marris: Amendment No. 418 is very useful because it shows that the Conservative party is concerned about the uprating mechanism for those who will contribute £215,000 to their pensions in one tax year. That is not a particularly important matter for this Committee.

George Osborne: Our concern to increase allowances by earnings rather than prices extends up and down the income scale, because we want to increase the basic state pension by earnings—something that the hon. Gentleman probably supports.

John McWilliam: Order. Before the hon. Member for Wolverhampton, South-West (Rob Marris) responds, I point out that the debate is not about the basic state pension; it is about a very narrow amendment.

Rob Marris: Thank you for your guidance, Mr. McWilliam. I was going to make the same point, and the hon. Member for Tatton (Mr. Osborne) is mistaken about my views on the issue.

Ruth Kelly: I am delighted to welcome you back to the Chair this afternoon, Mr. McWilliam, and I look forward to another exciting debate.

John McWilliam: Order. That has nothing to do with me; I am not allowed to take part.

Ruth Kelly: The hon. Member for Tatton raises the question of the quinquennial review and how we intend to index, or link, the lifetime allowance and the annual allowance. We are committed to a review system, which was made clear by the Chancellor, as well as myself, when he addressed the matter in the
 Budget. We have said that the first review will take place in 2010. We expect regular reviews after that, but it is not for me in this Room today to tie the hands of future Administrations.
 The quinquennial review was called for by the industry and by people who are interested in the future of the lifetime and annual allowances, and the point of it is to consider the level of allowance and allow it to be adjusted according to the prevailing circumstances of the time. The hon. Gentleman asked how it would be conducted. I imagine it will be conducted by Treasury Ministers, having taken advice from Inland Revenue and Treasury officials, and having consulted and listened to representations made by outside bodies.

George Osborne: The Government Actuary?

Ruth Kelly: Well, clearly, actuarial factors would be taken into account, as well as factors relating to longevity rates and so forth. Factors such as the inflation rate and the earnings rate may be considered, as well as the number of people bumping their heads against the cap.
 The hon. Gentleman asked what happened to the commitment made in December 2003. That was not a commitment, but a proposal that we link the cap to prices, which was put out for consultation. We consulted and we listened. People argued that they wanted certainty; we have provided certainty for the first five years by setting out the likely level of the lifetime and annual allowances in each of the next five years. That is the right approach; it is right to listen to representations. 
 The hon. Gentleman argues that in future the earnings link should be considered. That would provide for a mechanism that would be, by definition, less certain than the pre-announced arrangements in the Bill. As the hon. Gentleman is so attached to the idea of linking rates to earnings, I would urge him to consider the comments made by a former Member of this House, Norman Lamont, when he was Financial Secretary and he set the earnings cap. During a Standing Committee debate in 1989 he said: 
''We gave careful thought to the method of indexation when we designed the pension changes. Despite arguments that have been put forward, we remain convinced that prices indexation is the most appropriate approach.''
 He went on to say: 
''First, it is used in other parts of the tax system—for example for personal allowances. Secondly, and more importantly, it will be indexed. I say that in response to comments that the cap will be eroded . . . The real value of the limit will be maintained. It is only by maintaining the real value that my right hon. Friend the Chancellor was able to propose other aspects of the package''.—[Official Report, Standing Committee G, 8 June 1989; c. 336.]
 Clearly, my predecessor had his own views on the matter. 
 After consultation, we feel that certainty is the right approach. To those who recommend an earnings link I would make this point: how does one propose an earnings link to people who are maintaining the highest pension pots when so many other aspects of the tax system, including the basic state pension, are linked to prices? Having listened to representations, certainty was given overriding consideration in our 
 deliberations, which is why we have set out the numbers in the way we have. For those reasons, I suggest that the hon. Gentleman withdraw his amendment.

George Osborne: The Financial Secretary has obviously tried to learn a trick or two from her boss, the Chancellor of the Exchequer, who, as we saw at Treasury questions, deploys all sorts of election addresses and past quotes of people speaking against them. It is a pretty effective trick, although I often wonder what the Chancellor and all those on the Labour Benches were saying in 1989, when they had even more outrageous ideas than linking things to prices.

John McWilliam: Order. Some of us had the benefit of being here to listen to them, but that does not arise out of the amendment. It is quite narrow, and I would be obliged if the hon. Member returned to it.

George Osborne: Thank you, Mr. McWilliam. Norman Lamont was saying those things in my gap year.
 I said in my remarks that this Government and previous ones have increased the earnings cap with prices, but I made the point that that was not necessarily a justification for increasing either the lifetime or annual allowance by prices in future. I was interested to hear the Financial Secretary effectively disown the comment in the 2003 document by saying, ''That was only out for consultation; we have listened and we have changed our mind''. Actually, that was not a consultation document in the way that the 2002 document was; it is described as a response to the consultation. In the paragraph that I quoted from to begin with, it is made clear that the issue is not up for discussion. It says: 
''Accordingly the lifetime and annual allowances will be uprated annually by RPI.''
 I am glad the Government have moved away from that commitment, but they did so not as part of some consultation process but because they have changed their mind on a stated policy position. I welcome that, along with the generous increases in the lifetime and annual allowances that have been set out for the five years after 2006, but I have a question. Are we not to know until the quinquennial review in 2010 what the next set of five lifetime allowances will be? That leaves it late in the day. Whoever is Financial Secretary then—whether it is the hon. Lady, good as she is at her job, or maybe a Conservative—will, I hope, make the announcement about the lifetime allowance for 2011–12 before 2010, because people will need a bit more advance warning than that to make sensible decisions about their retirement. 
 The Financial Secretary's final argument, which was that the Government use prices to determine things such as the basic state pension, and it would be unfair to raise this figure by earnings, will not carry much weight on these Benches, because we are now in Committee to increase the basic state pension by earnings.

David Laws: Will the hon. Gentleman give way?

George Osborne: I am happy to give way, because I am very interested to hear the Liberal Democrats' current position on this policy.

David Laws: I am grateful to the hon. Gentleman. I am not going to derail the Committee in the way that he is trying to, but following his comment about linking the tax system to earnings rather than prices, I wonder whether he would want to see the personal income tax allowance indexed to earnings rather than prices in future. Is that a commitment?

George Osborne: I did not say that I wanted to see the tax system linked to earnings. I was merely pointing out that the argument used by the Financial Secretary was about the basic state pension. She denies that, but the record will show that that was what she employed in her defence, and it was not a particularly strong card to play. However, we are pleased with the generous increases way above RPI, and indeed above earnings, for people who are, as I am constantly reminded very wealthy—it is good to see her looking after them. I beg leave to withdraw my amendment.
 Amendment, by leave, withdrawn. 
 Amendment made: No. 324, in 
clause 207, page 174, line 13, at end insert— 
 '(7) In this Part references (however expressed) to a person's lifetime allowance at any time are to what would be the person's lifetime allowance, calculated in accordance with this section, if a benefit crystallisation event occurred in relation to the person at that time.'.—[Ruth Kelly.]
 Clause 207, as amended, ordered to stand part of the Bill.

Clause 208 - Availability of individual's lifetime allowance

Amendment made: No. 325, in 
clause 208, page 175, line 13, at end insert— 
 '(9) In this Part references (however expressed) to the portion of a person's lifetime allowance that is available at any time are to the portion of the person's lifetime allowance that would be available, calculated in accordance with this section, if a benefit crystallisation event occurred in relation to the person at that time.'.—[Ruth Kelly.]
 Clause 208, as amended, ordered to stand part of the Bill. 
 Clauses 209 and 210 ordered to stand part of the Bill.

Clause 211 - Non-residence: money purchase arrangements

Amendments made: No. 436, in 
clause 211, page 177, line 9, leave out from 'would' to end of line 10 and insert 
 ', on the valuation assumptions (see section (Valuation assumptions)), be available for the provision of benefits to or in respect of the individual under the arrangement if'.
 No. 437, in 
clause 211, page 177, line 14, leave out from 'would' to first 'the' in line 16 and insert 
 ', on the valuation assumptions, be available for the provision of benefits to or in respect of the individual under the arrangement if'.—[Ruth Kelly.]

George Osborne: I beg to move amendment No. 417, in
clause 211, page 177, line 30, after 'is', insert 
 'that part of the value of the individual's benefits under the arrangement which relate to'.
 Clauses 210 and 211 are about calculating the lifetime allowance for people who have been non-resident in the UK and have, therefore, not benefited from UK tax relief, but are members of UK pension schemes and have made contributions to those schemes. The clauses disregard those contributions for the purpose of the lifetime allowance or, rather, they increase the lifetime allowance by the equivalent of those contributions. 
 However—this is the point of our amendment—the lifetime allowance increases only by the amount of the contributions made and not by the investment growth on those contributions. That seems unnecessarily harsh and unfair. More and more people work in different countries and attempt are being made throughout Europe to encourage more Europe-wide pension schemes. 
 One hopes that Britain is well placed to take advantage of that attempt because it has such a successful financial services industry. We want to do what we can to encourage the industry, but it seems that we are placing a small hurdle in the way of the pensions sector. That is, as I said, unfair. The Government have conceded the principle that the contributions have not attracted tax relief and the lifetime allowance should be increased as a result. Surely the same principle extends to any investment growth on those contributions.

Ruth Kelly: The amendment seeks to increase the enhanced lifetime allowance available to relevant overseas individuals who have other money purchase arrangements. Such individuals are entitled to a lifetime allowance enhancement factor, which is applied to the standard lifetime allowance to arrive at the increased allowance. The factor is based on the amount of contributions paid during the period when the individual was non-resident. That is a straightforward and simple calculation. The amendment seeks to introduce an additional element to the calculation to bring in the investment build-up on the contributions.
 In many respects, the hon. Gentleman makes reasonable points. The aim may be to bring the calculation of the lifetime allowance enhancement factor for money purchase arrangements more into line with the equivalent calculation for other arrangements, such as defined benefit arrangements. However, defined benefit arrangements cannot be calculated by reference to contributions because, in a defined benefit scheme, it is often impossible to identify the contributions made in respect of a particular individual, so there would be different rules according to the different ways in which different types of scheme operate. The amendment would have a disproportionately complicating effect on the calculation and is not precise enough to be workable. It is not clear how that part of the value of the individual's benefits would be calculated. 
 As I have said, we must help taxpayers and schemes by providing clear and unambiguous valuation rules whenever possible. Our approach is an example of the clarity that people desire, and I urge the hon. Gentleman to withdraw the amendment.

George Osborne: To sum up what the Financial Secretary seems to be saying, she has a fair point, but there is an element of rough justice and to make the system work some people will lose out. That is a disappointing answer and I do not accept her argument that the amendment would force the Government to make a great distinction between defined benefit and defined contribution schemes. The method of calculating those points, as we have discussed at length, is different, so it is not as though it is an additional distinction that does not exist at the moment. It might be difficult to apply that principle to defined benefit schemes, but it would not be that difficult to devise a way of calculating investment growth in defined contribution schemes if those contributions were clearly tagged on entry into the scheme.

Rob Marris: I declare an interest as someone who has several years' contributions in the Canada pension plan, which is a state plan and is partially funded. It would be almost impossible for anyone to work out my contributions after a lapse of around 30 years between making the contributions and drawing a pension as an overseas pensioner. I shall probably receive around three Canadian dollars a month.
 My second point about the amendment is to ask the hon. Gentleman what ROIC means.

George Osborne: First, the hon. Gentleman says that it is difficult to identify his contributions from 30 years ago, but the Government will have to do that anyway under the new regime and uprate his lifetime allowance by the equivalent amount. They clearly believe that that can be done, which is why they have introduced the mechanism.
 In reply to the hon. Gentleman's second point, the clause states that the 
''ROIC is the amount of the contributions made under the arrangement by or in respect of the individual in any part of the active membership period during which the individual is a relevant overseas individual''.
 That is the meaning in the Bill and in our amendment.

Rob Marris: What does ROIC stand for?.

George Osborne: I imagine that it stands for relevant overseas individual contributions. It is a Government formula.
 The hon. Gentleman touches on a point made by the National Association of Pension Funds which I raised at the beginning of this debate. Many of the formulae in the Bill are unfamiliar to the industry, which believes that they could have been expressed more clearly. I am tempted to try to catch your eye, Mr. McWilliam, during the debate on the next Government amendment, which is about adjusting one of the formulae, and we could have this debate then. 
 I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 211, as amended, ordered to stand part of the Bill.

Clause 212 - Non-residence: other arrangements

Amendment proposed: No. 438, in 
clause 212, page 178, leave out line 10 and insert— 
 (RVFxPE+LSE) - (RVFxPB+LSB) 
 SLA 
 —[Ruth Kelly.]

John McWilliam: I remind the Committee that with this we are discussing Government amendment No. 445.

George Osborne: There are numerous Government amendments in the Bill, most of which are tidying-up amendments. These two amendments also fall into that category. However, looking at them yesterday evening, I could not see what the practical effect of changing the formulae would be. The amendments involve moving brackets. Those of us who did A-level maths know that moving brackets makes a big difference. However, it does not in this case.
 Let us consider amendment No. 438. It would make a difference if a bracket had been inserted before PE so that the formula read, ''RVF x (PE + LSE)'', but the Government have not done that. They have just moved the bracket from after PE to after LSE, which makes no difference mathematically as far as I am aware—and I have checked with a few people who have done their maths. I would be grateful if the Government would explain.

Ruth Kelly: I am absolutely delighted that the hon. Gentleman has taken such an interest in the arithmetical formulae before us today. Before I explain what the amendments are about, let me explain what the clause is about. It provides for individuals who do not get relief for contributions paid into registered schemes, because they do not have any UK taxable earnings, to have their lifetime allowance enhanced. Clause 211 sets out the calculation for the lifetime allowance enhancement factor for money purchase schemes. Clause 212 provides the rules for calculating the lifetime allowance enhancement factor referred to in clause 210 for members of schemes that have defined benefit or hybrid arrangements. As with clause 211, clause 212 separates out the increases in benefits under the arrangement for which the individual has not received UK relief. It then divides that by the standard lifetime allowance and applies that factor to increase the individual's lifetime allowance.

Rob Marris: Will the Financial Secretary give way?

Ruth Kelly: I am sure that my hon. Friend has an interesting point to make.

Rob Marris: My understanding of mathematics might be faulty, because I do not have the benefit of maths A-level. However, I do have the dubious benefit of a maths O-level—taken before the hon. Member for Tatton was born—in which I think I got a grade 4. My memory of algebra is that the position of the bracket is important. It is certainly important in this formula. I will need some convincing by the hon. Gentleman that
 the position of the bracket in the formula is immaterial. It looks extremely important. If he gets a chance to speak later, perhaps he will explain a little more about where brackets go and where they do not. The position seems to make a material difference.

John McWilliam: Order. As someone who did an electronics degree and, therefore, by definition, an ordinary degree in mathematics, I am sorry that I cannot indulge in this debate.

Ruth Kelly: I am coming on to discuss the minor technical amendment before us, which moves the position of the bracket in the formula. Some members of the public have a greater knowledge of arithmetic than the hon. Member for Tatton. It was a member of the public who pointed out to us that the bracket needed to be moved for the formula to make algebraic sense. We could have a debate on the arithmetic behind that, but I hope that the hon. Gentleman will accept the maths on trust. If he really wants to follow this point up, I will write to him explaining the difference that the change makes. I thank the person who pointed this matter out to our team and I ask the hon. Gentleman to withdraw his amendment.

John McWilliam: The hon. Gentleman had better be careful when he describes the maths, because I understand it.

George Osborne: I shall be very careful. I shall also be careful not to follow the Financial Secretary's advice and withdraw the amendment. If I did, the good work of that member of the public would be undone. In fact, it is not in my power to withdraw the amendment. However, there is a point to be made.
 The Government introduce all these amendments. Most of the time, we are assured that they tidy up the Bill. In this case, I believe that it is probably meant just to make the clause look more elegant, as it does not actually affect the maths at all.

John McWilliam: Order. I am not seeking to enter this debate, but I have to tell the hon. Gentleman that he is in danger of misleading the Committee if he persists with that argument.

George Osborne: We can have this debate in the margins of the Committee. I shall not divide the Committee on the Government amendment.

James Purnell: Or multiply it.

John McWilliam: We have enough members of this Committee.
 Amendment agreed to. 
 Amendments made: No. 439, in 
clause 212, page 178, line 13, leave out from first 'the' to end of line 14 and insert 
 'annual rate of the pension which would, on the valuation assumptions (see section (Valuation assumptions)), be payable to the individual under the arrangement if the individual became'.
 No. 440, in 
clause 212, page 178, line 16, leave out from 'would' to 'entitled' in line 18 and insert 
 ', on the valuation assumptions, be entitled under the arrangement (otherwise than by commutation of pension) if the individual became'.
 No. 441, in 
clause 212, page 178, line 20, leave out from first 'the' to end of line 21 and insert 
 'annual rate of the pension which would, on the valuation assumptions, be payable to the individual under the arrangement if the individual became'.
 No. 442, in 
clause 212, page 178, line 23, leave out from 'would' to 'entitled' in line 25 and insert 
 ', on the valuation assumptions, be entitled under the arrangement (otherwise than by commutation of pension) if the individual became'.—[Ruth Kelly.]
 Clause 212, as amended, ordered to stand part of the Bill. 
 Clause 213 ordered to stand part of the Bill.

Clause 214 - Overseas scheme transfers:

Amendments made: No. 443, in 
clause 214, page 180, line 28, leave out from 'would' to third 'the' in line 30 and insert 
 ', on the valuation assumptions (see section (Valuation assumptions)), be available for the provision of benefits to or in respect of the individual under the arrangement if'.
 No. 444, in 
clause 214, page 180, line 33, leave out from 'would' to first 'the' in line 35 and insert 
 ', on the valuation assumptions, be available for the provision of benefits to or in respect of the individual under the arrangement if'.—[Ruth Kelly.]
 Clause 214, as amended, ordered to stand part of the Bill.

Clause 215 - Overseas scheme transfers:

Amendments made: No. 445, in 
clause 215, page 181, leave out line 23 and insert— 
 (RVF(PE+LSE) - (RVF(PB+LSB)
 No. 446, in 
clause 215, page 181, line 26, leave out from first 'the' to 'entitled' in line 28 and insert 
 'annual rate of the pension which would, on the valuation assumptions (see section (Valuation assumptions)), be payable to the individual under the recognised overseas scheme arrangement if the individual became'.
 No. 447, in 
clause 215, page 181, line 30, leave out from 'would' to 'entitled' in line 32 and insert 
 ', on the valuation assumptions, be entitled under the arrangement (otherwise than by commutation of pension) if the individual became'.
 No. 448, in 
clause 215, page 181, line 34, leave out from first 'the' to end of line 35 and insert 
 'annual rate of the pension which would, on the valuation assumptions, be payable to the individual under the arrangement if the individual became'.
 No. 449, in 
clause 215, page 181, line 37, leave out from 'would' to 'entitled' in line 39 and insert 
 ', on the valuation assumptions, be entitled under the arrangement (otherwise than by way of commutation of pension) if the individual became'.—[Ruth Kelly.]
 Clause 215, as amended, ordered to stand part of the Bill. 
 Clause 216 ordered to stand part of the Bill.

Clause 217 - Annual allowance

George Osborne: I beg to move amendment No. 425, in
clause 217, page 183, leave out line 2 and insert— 
 '(2) The annual allowance is as follows— 
 (a) for the tax year 2006–07, £215,000 
 (b) for the tax year 2007–08, £225,000 
 (c) for the tax year 2008–09, £235,000 
 (d) for the tax year 2009–10, £245,000 
 (e) for the tax year 2010–11, £255,000.'.
 The clause sets the annual allowance—the amount by which the value of a pension pot is allowed to increase without incurring a tax charge—at £215,000 for the first year. Amendment No. 425, which is similar to my previous amendment on the lifetime allowance, merely seeks to include in the Bill the allowances for the years 2007–08 to 2010–11, which are set out in the explanatory notes but not in the Bill. Perhaps the Financial Secretary could remind us why that should be the case. She said earlier that they could just as easily have been in the Bill as in the explanatory notes. Surely it would be better to put the figures in the legislation with which people will deal. 
 Perhaps the Financial Secretary could say a little as well about the logic of the annual allowance. It is possible to think of a system with a lifetime allowance but no annual allowance, and one with an annual allowance but no lifetime allowance. Perhaps she could explain why the Government feel that they need both controls. 
 In the 2002 consultation document, the Government explained that the prime purpose was to limit the 
''tax leakage which can occur when a determined opportunist tries to wash contributions through a pension fund quickly, planning to extract the proceeds improperly.''
 Say we have a determined opportunist—let us call him Tony. Surely control must be exercised not on the amount going in but on the amount coming out. The Government say that the reason for an annual allowance is to stop people extracting proceeds improperly. If that is the case, the control should be on the extraction of the proceeds, not on what is going in. Will the Financial Secretary confirm that, as the annual allowance does not apply in the year in which the pension vests, this determined opportunist could pull off the same trick in that year? If Tony were over the age of 50, he could pull it off this year, that year, the next year or whenever the pension vests. 
 If the measure is supposed to be a key control for the Inland Revenue to prevent some sort of tax 
 evasion or scam, it has some pretty big holes in it. A pension can vest not only on retirement, but when someone receives redundancy, a scheme winds up, there is ill health or whatever. There are a lot of gaps in that control and, if its purpose is as I have just stated, it is not particularly effective. 
 The provision will introduce another rule to the system and it could hit the lucky investor. The dotcom boom was not that long ago, and it is perfectly possible to imagine someone putting a £20,000 stake into some shares, seeing them go up 10-fold in a year and going close to or over the annual allowance. It will penalise investor decisions. One feature of the system is that it allows people to put in large sums when they are able to make them, but a good or lucky investor could as a result see their pension pot increase by more than £215,000 in a particular year.

Rob Marris: Either the hon. Gentleman or I, and of course I suspect that it is he rather than I, misunderstands the annual allowance. If an individual put £20,000 into their pension scheme and it went up 12-fold, which would be more than £215,000, it would not break the annual allowance because having been put in the pension scheme it would therefore be within the pension scheme. It is the total pension input amount, not the amount within the pension in a given year.

George Osborne: The hon. Gentleman may well be right, but even if I withdraw that final point on the grounds that it is not as strong as it could be, will the Financial Secretary explain the broader point about the need for the annual allowance as a check—if it is a check—on the gaps in the system that exists? Surely, the check should exist on the improper extraction of proceeds. Why is the provision not in the Bill?

Rob Marris: With amendment No. 425, the hon. Gentleman seems to retread his unsuccessful amendment No. 418, which sought to link the allowance with the increase in national average earnings. As an optimist, he expects to be in government and, mathematically, according to the figures in amendment No. 425, he expects that under a Conservative Government the increase in national average earnings will fall year on year.

John McWilliam: Order. Sums is hard.

Ruth Kelly: The real issue is about whether we should have an annual allowance limit, but I will quickly deal with the question that the hon. Member for Tatton raised about whether the limit should be in the Bill. My right hon. Friend the Chancellor announced the limits in the Budget, they are in the explanatory notes and we will use a Treasury order to introduce them. That is the normal way in which such things are done, and I could not make the intention of the Government clearer than I have made it today.
 The hon. Gentleman makes an interesting point about whether we need an annual allowance as well as a lifetime allowance. In an ideal world, perhaps we would not need that additional control. It has been set at a very high level and it will affect hardly any people, although no doubt there will be some who want to put more than £215,000 into their pension pot in the first year. My hon. Friend the Member for 
 Wolverhampton, South-West made an excellent point, however: it affects only contributions to the fund; it does not affect the investment growth in any year. 
 So, if the case that the hon. Gentleman raised were to occur, people would be fine. They would eventually be tested against the lifetime allowance, but we have debated that. 
 I remember spending many happy hours in the Treasury, debating whether we needed an annual limit as well as a lifetime allowance. We concluded that it was necessary in order to make sure that certain possibilities for evasion could not occur. In fact, the annual limit is an integral part of the regime. 
 I will detail one example of the sort of abuse that could occur, and that I was particularly concerned about when designing the scheme, if we had a lifetime allowance but no annual allowance. Imagine the situation in which, to take a country at random, a United States resident came to live and work in the United Kingdom for a short period, possibly a couple of years, as is frequently the case in, for example, the City of London. Between them, the US resident and his employer put £1.5 million into the employer's UK-registered pension scheme. Both would get full UK tax relief on their contributions, up to the maximum allowed under our proposals. That resident would then go back to the United States to continue working, perhaps with his previous employer, and transfer all the funds from the UK into the fund in the United States of America. There would be no tax charge on that. It would be impossible to test his cumulative pension against the lifetime allowance when, in due course, he took his pension. The UK Exchequer would suffer a considerable loss.

George Osborne: Will the Financial Secretary confirm that that trick could be pulled off if the person was older than the minimum retirement age and the pension was vested in the year in which that person put the £1.5 million into the scheme? There is no annual allowance in the year when the pension vests.

Ruth Kelly: I would not say that that was a trick. In fact, we listened to representations on it, because people need extra flexibility in the year that their pension is vested. However, I gave an example of an opportunistic individual who came to the country, rapidly took advantage of UK tax relief, and then went back to their own country, with us unable to exercise our rights to reclaim some of that money.

Howard Flight: If that American were a member of a UK pension scheme, it would not normally be possible to transfer out sums to a US scheme. If they went back to the US, whatever pension from the UK was due would be paid, but it would be subject to a standard 20 per cent. withholding tax.

Ruth Kelly: Well, of course, we have tax-recovery mechanisms to try to reclaim tax. One of the examples that we might use is the EU directive on mutual assistance and the recovery of debt. There are responsibilities that that individual would have to fulfil. I must say that that is a blunt tool for recovering tax. There would still be avoidance opportunities.
 Clearly, if someone was not drawing down benefits in the UK, they would not be taxed on that income in retirement and we would not, perhaps, be able to claim back some of that tax relief. It could pose a significant threat to the Exchequer.
 The annual allowance struck us as a reasonable compromise to try to ensure that such short-term, opportunistic behaviour was not able to take place, while affecting few individuals who were resident in the UK for a considerable period and who planned to draw down their pension income in the UK on retirement. As I said, it is an integral part of our reforms. We will keep that aspect of the reforms under review, as we will keep other aspects under review. So, I ask the hon. Gentleman to withdraw his amendment.

George Osborne: The Financial Secretary said that the annual allowance was an integral part, and then said that she spent many hours debating whether it should be in or not, so the Inland Revenue must have thought that it was not necessarily integral. As I say, we share the same objective. We do not want loopholes or opportunities for tax evasion, but I wonder how effective they will be under the current system, because the Government have set a generous annual allowance. US citizens are still able to put in £500,000, or near enough—albeit not £1.5 million, but still a large sum. If they do so in the year when the pension is invested, when they claim an ill-health pension or if there is a redundancy package, the annual allowance does not apply anyway.
 I am not going to divide the Committee on this issue—it is a complex extra administrative burden on the system. We will take it on trust when the Government assure us that the annual allowance is necessary. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 217 ordered to stand part of the Bill. 
 Clause 218 ordered to stand part of the Bill.

Clause 219 - Cash balance arrangements

Amendments made: No. 450, in 
clause 219, page 183, line 36, leave out from 'would' to third 'the' in line 37 and insert 
 ', on the valuation assumptions (see section (Valuation assumptions)), be available for the provision of benefits to or in respect of the individual under the arrangement if'.
 No. 451, in 
clause 219, page 183, line 40, leave out from 'would' to third 'the' in line 41 and insert 
 ', on the valuation assumptions, be available for the provision of benefits to or in respect of the individual under the arrangement if'.—[Ruth Kelly.]
 Clause 219, as amended, ordered to stand part of the Bill. 
 Clauses 220 to 222 ordered to stand part of the Bill.

Clause 223 - Defined benefits arrangements

Amendments made: No. 452, in 
clause 223, page 185, line 40, leave out from first 'the' to end of line 41 and insert 
 'annual rate of the pension which would, on the valuation assumptions (see section (Valuation assumptions)), be payable to the individual under the arrangement if the individual became'.
 No. 453, in 
clause 223, page 185, line 44, leave out from 'would' to 'entitled' in line 1 on page 186 and insert 
 ', on the valuation assumptions, be entitled under the arrangement (otherwise than by commutation of pension) if the individual became'.
 No. 454, in 
clause 223, page 186, line 6, leave out from first 'the' to end of line 7 and insert 
 'annual rate of the pension which would, on the valuation assumptions, be payable to the individual under the arrangement if the individual became'.
 No. 455, in 
clause 223, page 186, line 9, leave out from 'would' to 'entitled' in line 11 and insert 
 ', on the valuation assumptions, be entitled under the arrangement (otherwise than by commutation of pension) if the individual became'.—[Ruth Kelly.]
 Clause 223, as amended, ordered to stand part of the Bill.

Clause 224 - Defined benefits arrangements:

George Osborne: I beg to move amendment No. 422, in
clause 224, page 186, line 17, leave out from '223(4)' to end of line 18.
 Clauses 223 and 224 are about calculating the increase in the value of the defined benefit pension over the year for the purpose of testing it against the annual allowance. Clause 223 introduces the simple factor of 10 as a method of evaluation for active members. 
 Clause 224, to which my amendment applies, is about deferred members of defined benefit schemes. Increases in accrued rights up to the higher of either the rate of inflation or 5 per cent. do not count towards the annual allowance. This might be fair for deferred members, but it seems a bit unfair on active members, and the treatment is inequitable. Our amendment attempts to create a level playing field, as it would extend the adjustment to the pension at the beginning of the pension period by extending it to both active and deferred members: both could enjoy an uprating without it counting towards an annual allowance. It seems a bit strange that the Government are treating deferred members differently from active members. By the way, in the cash balance plans in clause 220, where the measurement method is very similar, there is no distinction between deferred and active members. If that is the case with the cash balance plans, why is it not the case with defined benefit plans?

Ruth Kelly: I am afraid the hon. Gentleman has completely misunderstood the purpose of clause 224, which provides for an adjustment to be made to the pension input amount for defined benefit arrangements in cases where the member does not during the year actively accrue rights under the arrangement. The effect of that adjustment is to reduce the pension input amount by the greater of 5 per cent., the rate by which the retail prices index has increased over the year or the rate provided for in Inland Revenue regulations. The amendment seeks to extend the effect of this clause to cases where the member is actively accruing rights, but the hon. Gentleman fails to appreciate that clause 224 is there purely to ensure that members who do not accrue rights under an arrangement are not put to any trouble of calculating their pension input amounts for the purposes of the annual allowance.
 I will give the Committee a couple of examples of how that might work in practice. Many deferred pensions are, under the rules of the scheme, increased by a flat rate of 5 per cent. a year. The clause ensures that deferred members of such schemes do not have to worry about the annual allowance charge. That will be the case even when the inflation rate is low, as it is and as we intend to keep it. Furthermore, many pension schemes are obliged to apply what is called statutory revaluation to the future pensions of deferred members. The regulations made under the clause—I have sent draft copies of them to the Committee—will ensure that where the statutory revaluation is greater than the RPI or 5 per cent., the amount of the statutory revaluation is again ignored for annual allowance purposes. 
 However, we want to capture the savings of active members of defined benefit schemes to calculate their pension input amount. There is no unfairness in that. The generous annual allowance, which we have just been debating, and the annual increase in that allowance will allow their pension savings to grow by a real amount without being subject to a tax charge. 
 The hon. Gentleman draws attention to the treatment of cash balance arrangements. They are dealt with under clause 220. However, clause 220 is there for an entirely different purpose. It allows members of cash balance arrangements to deduct whichever is higher, RPI indexation or 5 per cent., from their pension input amount. That provides broad parity of treatment with other money purchase arrangements, under which only the contributions and not the investment build-up are taken into account for annual allowance purposes. 
 Clause 224 is merely intended to help deferred members of schemes. We actively want to capture active members of such schemes. I therefore urge the hon. Gentleman to withdraw his amendment.

George Osborne: The Financial Secretary accuses me of misunderstanding the clause. In that case, the people in the pensions industry who proposed the amendment have also misunderstood the clause, which seems to prove that the Government have not made their case very clearly. She says that it is all about saving trouble
 for deferred members, and actively capturing active members. However, surely the Government could have spared active members the trouble of going through the process if the increase had been within the 5 per cent. or RPI range. However, I will not press the matter to a vote. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 224 ordered to stand part of the Bill. 
 Clauses 225 to 227 ordered to stand part of the Bill.

Clause 228 - Scheme sanction charge

Amendment made: No. 456, in 
clause 228, page 189, line 3, leave out subsection (4).—[Ruth Kelly.]
 Clause 228, as amended, ordered to stand part of the Bill. 
 Clauses 229 to 235 ordered to stand part of the Bill.

Clause 236 - Taxation of non-pension benefits

Amendment made: No. 457, in 
clause 236, page 194, line 11, leave out from 'to''' to end of line 12.—[Ruth Kelly.]
 Clause 236, as amended, ordered to stand part of the Bill.

Clause 237 - Registered pension scheme return

Amendment made: No. 458, in 
clause 237, page 196, line 15, leave out 'payment' and insert 'provision'.—[Ruth Kelly.]
 Clause 237, as amended, ordered to stand part of the Bill.

Clause 238 - Information: general requirements

Amendments made: No. 459, in 
clause 238, page 197, line 4, after 'Revenue' insert 
 ', in a form specified by the Board of Inland Revenue,'.
 No. 460, in 
clause 238, page 197, line 19, leave out 'payment' and insert 'provision'.
 No. 461, in 
clause 238, page 197, line 39, leave out 'paid' and insert 'provided'.—[Ruth Kelly.]
 Clause 238, as amended, ordered to stand part of the Bill.

Clause 239 - Notices requiring documents or particulars

Amendments made: No. 462, in 
clause 239, page 198, line 27, leave out 'payment' and insert 'provision'.
 No. 463, in 
clause 239, page 198, line 43, at end insert—[Ruth Kelly.]
 Clause 239, as amended, ordered to stand part of the Bill. 
 Clauses 240 and 241 ordered to stand part of the Bill.

Clause 242 - Assessments under this Part

Amendment made: No. 464, in 
clause 242, page 200, line 42, leave out from 'provision' to end of line 43 and insert 
 'for and in connection with the making of assessments in respect of— 
 (a) the unauthorised payments charge, 
 (b) the unauthorised payments surcharge, 
 (c) liability to the lifetime allowance charge under section 206(2) (person to whom lump sum death benefit paid), 
 (d) the scheme sanction charge, 
 (e) liability under section 259 (trustees etc.liable as scheme administrator), 
 (f) liability under section 260 (member liable as scheme administrator), and 
 (g) liability under section 394 of ITEPA 2003 (benefit under employer-financed retirement benefits scheme: charge on responsible person).'.—[Ruth Kelly.]
 Clause 242, as amended, ordered to stand part of the Bill. 
 Clauses 243 ordered to stand part of the Bill.

Clause 244 - Registered pension scheme return

Amendment made: No. 465, in 
clause 244, page 201, line 41, leave out '£300' and insert '£100'.—[Ruth Kelly.]
 Clause 244, as amended, ordered to stand part of the Bill. 
 Clause 245 ordered to stand part of the Bill.

Clause 246 - Documents and particulars required by notice

Amendment made: No. 466, in 
clause 246, page 202, line 24, leave out 'of' and insert 'not exceeding'.—[Ruth Kelly.]
 Clause 246, as amended, ordered to stand part of the Bill. 
 Clauses 247 to 253 ordered to stand part of the Bill.

Clause 254 - Lifetime allowance charge

George Osborne: I beg to move amendment No. 419, in
clause 254, page 206, line 21, leave out 'and (b)' and insert 'or 
 (b) the scheme administrator reasonably believed that the liability would be met by another person, and in either case, 
 (c)'.
 I supposed that you would kill me, Mr. McWilliam, if I moved the amendment formally.

John McWilliam: Order. If the hon. Gentleman wants to move the amendment formally, he could always reply.

George Osborne: Clause 254 allows a scheme administrator to apply to the Inland Revenue to be
 excused from a lifetime allowance charge on the ground that an administrator ''reasonably believed'' that there was no such liability. I shall speak narrowly to the amendment because I know that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) wants to catch your eye, Mr. McWilliam, to talk about the stand part debate.
 The amendment would simply add another ground upon which a scheme administrator could apply to the Inland Revenue when 
''the scheme administrator reasonably believed that the liability would be met by another person''.
 If someone takes several pensions from several schemes at the same time and goes over the lifetime allowance and the scheme administrator is told by that person that another scheme is dealing with it, it cannot be right for the scheme administrator to be penalised. I am not sure whether that situation is covered by the clause because the scheme administrator could not claim that they thought that there was no liability. They would have been aware that there was a liability, but thought that someone else was dealing with it. 
 The point is narrow and one would hope that the Inland Revenue would, in practice, exercise discretion, but I am not sure whether the legislation would allow it to exercise that discretion. Therefore, it might be useful for the Inland Revenue to take that on board.

Ruth Kelly: I shall try to respond purely on that point, given that the hon. Member for Arundel and South Downs wants to talk about the purpose behind the clause. It is quite difficult to discuss the amendment without discussing the purpose behind the clause, however. The question is whether it is reasonable for the Revenue to discharge the scheme's liability where the scheme has written an agreement that the member or other scheme will pay. We have to both protect the Exchequer and enforce the lifetime allowance charge where it is legally due, giving schemes a let out only in the very narrow circumstances that I have described.
 Schemes have to accept that they are liable for the lifetime allowance charge. It would be unwise of a scheme to enter into an agreement with a member, for example. Such an agreement would not relieve the scheme of its tax obligations. It would be even more unwise for it to enter into an agreement with another scheme because another scheme would have no liability for a lifetime allowance charge arising in respect of a different scheme. 
 I do not agree that it is appropriate to provide the tax to be discharged to the detriment of the Exchequer simply because the scheme has entered into some understanding with someone that they would satisfy the scheme's liability. On that basis, I ask the hon. Gentleman to withdraw his amendment.

George Osborne: There is the potential for some injustice here, where a scheme administrator doing everything possible to discharge their obligations is misled by the member of the scheme and then gets clobbered by the Inland Revenue. However, one would hope that in practice the Inland Revenue will exercise a bit of discretion and, if not, in the event of an appeal to the commissioners, that it would see that
 there were grounds for common sense. However, as my hon. Friend the Member for Arundel and South Downs wants to develop some of the broader points during the stand part debate, I shall not press the amendment to a Division. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Howard Flight: The clause provides that the administrator will pay the charge where members of the scheme are over the lifetime limit. It strikes me that in principle and, to a lesser extent, in practice, the Government's proposals are somewhat flawed in that area because there is no obligation for the scheme to recoup what it has paid from the member either in straight money or through adjusting their pension.
 A growing number of senior people in the public sector will be caught by the lifetime limit, such as justices, senior people in the judiciary and senior executives in local authorities, and I have even been surprised to discover that a number of doctors in my constituency have pensions that will already be over the lifetime limit. To put it bluntly, any part of the public sector could, if it so chooses, simply pass the bill on to the taxpayer. That would constitute a stealth situation where public sector pensions are increasingly subsidised by the taxpayer, while private sector pensions are increasingly hit by higher taxes. 
 Even within the private sector, to the extent that there are comfortably funded defined benefit schemes left that become better placed in the next few years, a situation could develop where the scheme foots the bill for senior staff who are generously pension provided. We want to hear what the Government have to say about that, but otherwise we may want to see whether an amendment can be tabled on Report that clearly obliges the pension scheme to recoup the excess from the member.

Rob Marris: Would not the trustees of the pension scheme be in breach of their fiduciary duties if they did not seek to recover that tax in the scenario outlined by the hon. Gentleman? There is already adequate protection.

Howard Flight: I thank the hon. Gentleman for his intervention. He is the lawyer, not I, but I am not certain that he is necessarily correct, because the trustees could argue that they had no legal basis on which to recover the tax. There might be certain extant agreements—in local authority pension schemes, for example—where existing agreements with members would be breached.
 I hope that the hon. Gentleman is right, but as I am advised that there is not an automatic and secure legal position in which the scheme administrator is obliged to recover the tax that they have paid out, I am interested to hear what the Government have to say. It is not good enough to say, ''We certainly think that that will happen in all cases.'' Will it happen in all cases and, if not, what are the cases in which it will not?

Ruth Kelly: We are straight into what happens to the lifetime allowance charge. The hon. Gentleman thinks that there should be a requirement for schemes to reduce members' benefits to fund the tax, arguing that in public sector schemes, for example, the taxpayer could end up footing the bill. In fact, he will be interested to know that the Inland Revenue pensions simplification team benefited from a review conducted by Watson Wyatt, benefits consultants, which asked schemes how they were likely to react in that situation. It says:
''Of the changes being considered, the overwhelming majority are looking at options which do not increase costs to the company with only a very small percentage willing partially to compensate executives for the increase in tax.''
 In fact, over 95 per cent. of companies said that they would not consider compensating employees for any increased tax. It is perhaps not surprising that the overwhelming majority will reduce members' benefits to fund the tax. 
 I put it to the hon. Gentleman that, as part of the recruitment and retention benefits resulting from this change for higher earners, perhaps it is right that employers should have as much as freedom as possible over how and whether they choose to remunerate high earners in different ways. That could be one consequence of the simplification proposal that we introduce. If schemes choose to absorb some of the lifetime allowance charge, they will want to consider how to do so.

Howard Flight: I would be grateful if the Financial Secretary could confirm that the Watson Wyatt survey covered only private sector pension schemes. I am particularly interested to know the position for public sector pension arrangements, because the taxpayer, not the company, would ultimately pick up that bill.
 I appreciate the Financial Secretary's arguments in favour of flexibility, but she confirms the Government hope that the charge will be passed on at the bottom of the heap, citing surveys to demonstrate its likelihood. There is no certainty that it will be passed on. It would be absolutely wrong if, in the public sector, it was not passed on but levied on the taxpayer. If I recollect, it would mean that the Lord Chancellor, the Prime Minister and potentially quite a large number of highly paid people would escape the limits imposed by the new regime.

Ruth Kelly: I will deal with both points. First, on the private sector, I do not have a view about how firms arrange their recruitment and retention or form their executive packages. It is a decision best made by the firms themselves. They could either allow the individual member of a scheme to pay the lifetime allowance charge—they could decide under our new arrangements that they wanted to supplement that with an unfunded scheme that is not subject to pension tax privileges—or they could absorb some of the charge themselves. Clearly, the firms should make that decision when they design their recruitment and retention packages. It would not be right for me to tell them what to do.
 However, the hon. Gentleman's point on the public sector is of real public interest. Let me put it on the record absolutely plainly that public sector schemes 
 will ensure that the individual meets any lifetime allowance charge. There will be no exceptions. The Government, as the employer, will not pay the charge for the individual. As the hon. Gentleman rightly pointed out, that would, in effect, constitute an increase in remuneration.

Howard Flight: Can the Financial Secretary confirm that that includes local government?

Ruth Kelly: It includes the other members to which the hon. Gentleman referred, and I believe that it also includes local government. If it does not, I shall write to him to correct that answer.
 Question put and agreed to. 
 Clause 254 ordered to stand part of the Bill. 
 Clauses 255 to 258 ordered to stand part of the Bill.

Clause 259 - Trustees etc. liable as scheme administrator

Amendment made: No. 467, in 
clause 259, page 211, line 33, leave out subsection (6).—[Ruth Kelly.]
 Clause 259, as amended, ordered to stand part of the Bill.

Clause 260 - Members liable as scheme administrator

Amendments made: No. 468, in 
clause 260, page 212, line 10, leave out 
 ', and is assessable accordingly,'.
 No. 469, in 
clause 260, page 212, line 21, leave out from 'as,' to second 'the' in line 23 and insert 
 'is held for the purposes of such of the arrangements under the pension scheme as relate to'.
 No. 470, in 
clause 260, page 212, line 41, leave out 'made by virtue of' and insert 
 'in respect of a liability under'.
 No. 471, in 
clause 260, page 213, line 1, leave out 'a' and insert 'an occupational'.
 No. 472, in 
clause 260, page 213, line 4, leave out 'is' and insert 'was'.—[Ruth Kelly.]
 Clause 260, as amended, ordered to stand part of the Bill. 
 Clauses 261 and 262 ordered to stand part of the Bill.

Clause 263 - Relevant valuation factor

George Osborne: I beg to move amendment No. 420, in
clause 263, page 214, line 9, leave out '20' and insert 
 'the number certified from time to time by the Government Actuary which is appropriate having regard to the age of the individual.'.

John McWilliam: With this it will be convenient to take amendment No. 421, in
clause 263, page 214, line 13, leave out 'than 20' and add 
 'or less than the appropriate number certified by the Government under subsection (1).'.

George Osborne: With these amendments and this clause, we return to the familiar discussion about the relevant valuation factor; in other words, the factor of 20, by which a defined benefit pension is multiplied to calculate the lifetime allowance. As I have said, it allows someone with a defined benefit scheme to draw a pension of £75,000, while those with a defined contribution scheme are likely to be allowed a much smaller pension—some £20,000 less.
 In case the Financial Secretary has not been persuaded by my arguments during the past fortnight—there is certainly no evidence that she has been—let me quote a senior Inland Revenue official who, before joining the Revenue, made a submission to the Treasury Committee. I refer to Mr. Edward Troup, who has just become head of the Treasury business unit, as my hon. Friend the Member for Arundel and South Downs reminds me. In a personal memorandum submitted to the Treasury Committee, he stated: 
''The debate over the size of the cap on tax privileged pensions has over-shadowed the question of how that cap should be measured. The current proposed method of valuation carries a risk of inequities and inappropriate incentives being created between money purchase and defined benefit schemes.''
 That is a man whose judgment the Financial Secretary trusts enough to put him in charge of one of the important departments of the Treasury. It is surprising, therefore, that she has not listened to him on this matter. No doubt, once he gets his hand on internal policy advice, the Government's position may change, but for the moment he has had to put his position publicly. 
 There is also an element of inequity in the defined benefit pension world, because a 55-year-old with a pension of £75,000 has the same lifetime allowance as a 74-year-old, even the day before his or her 75th birthday. In other words, the system is generous to those who retire young, and not so generous to those who work longer and retire later. That runs contrary to everything else that the Government are trying to achieve—getting people to work longer or, as the Financial Secretary puts it, giving people the opportunity to work longer. 
 I already said that there is merit in having a simple 20 to 1 valuation. I know that the Association of Consulting Actuaries proposed it. I merely raise, through probing amendments, the question of whether there is a danger that it is too simple and unfair on older people. 
 My amendment would leave it to the Financial Secretary's best friend—the Government Actuary—to provide the valuation factor. I assume that he would group people by age, so, by way of illustration, for 55 to 60-year-olds, there might be a 25 to 1 valuation, for 60-year-olds a 20 to 1 valuation and so on. That would also allow the valuation factor, even if just a single factor, to be varied in light of changing mortality without the need to amend primary legislation. 
 Before the Government rubbish what I just said, I point out that it is exactly what they proposed in 
 December 2002 in their original consultation document. When they first considered the issue, it was their solution. The Financial Secretary explained the benefits and the simplicity of the 20 to 1 valuation factor. I agree with that and I have said so. Will she also let us into some of the thinking that went on in the Inland Revenue about the possible disadvantages of a single valuation factor, what perverse incentives it might have on people choosing early retirement dates and whether there is a degree of unfairness for older people in defined benefit schemes? I would be grateful if the Financial Secretary explained why the Government changed their mind.

Rob Marris: Mr. McWilliam, will you allow this debate to drift into stand part, rather than just being on the amendments, because we are talking about the numbers?

John McWilliam: The amendment is quite specific, whereas clause stand part is wider. I suggest that the hon. Gentleman wait till clause stand part if he wants to go wider.

Ruth Kelly: I was intending to deal with some of the general arguments as well.

John McWilliam: The Financial Secretary can do so in clause stand part.

Ruth Kelly: Let me deal then with the amendments under consideration. The amendments seek to replace the 20 to 1 valuation factor that we have adopted on the basis of recommendations from the Institute of Actuaries and the Association of Consulting Actuaries, among others. An actuary was seconded to the simplification team from the private sector to work on the issue. The amendments seek to replace that simple approach with a much more complex one, where individual calculations are based on tables produced at intervals by the Government Actuary. A range of GAD tables would be needed for each age group. To be fair, it would probably be necessary to update those tables regularly. One might also argue that one had to factor in the period over which the benefit had accrued, and indeed perhaps to provide differentials between men and women. It is quite easy to see how those tables could become extremely complex over time. In fact, the use of tables could completely undermine one of the main purposes of pension simplification, which is to be as simple and understandable as possible. So, on that very narrow point, I suggest that hon. Gentleman withdraw his amendment.

John McWilliam: Order. In view of the ruling that I just gave to the hon. Gentleman, if he has any general points he can make them on clause stand part.

George Osborne: It seems strange that the Financial Secretary says that my amendment would completely undermine the simplicity of the pension arrangements. If that is the case, why were tables originally the Government's idea? Let me read you the sentence, Mr. McWilliam, from the 2002 consultation document. The section on the lifetime limit says that
''the Inland Revenue will publish actuarial tables determining the capital value of defined benefit rights for people of different ages in different kinds of scheme.''
 That was what the Government were planning to do. It then says that they listened to the Association of Consulting Actuaries, and I am glad that they did on this occasion, although they did not do so on some other amendments that we have advanced in this Committee, some of which the association proposed. 
 As I said when I introduced this amendment, I am not saying that the Government are wrong.

John McWilliam: Order. May I assist the hon. Gentleman? The amendment itself is quite narrow, but he is asking a question that should be put on clause stand part.

George Osborne: Thank you, Mr. McWilliam. I was merely wondering why the Financial Secretary and the Government had moved away from the scheme in my amendment, which was something that they had originally proposed. However, I have made the point, and I am looking forward to the lengthy clause stand part debate that we are about to have. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Rob Marris: We have had a debate on the amendment on simplicity, and I now turn to subsection (2), leaving aside for a minute the grossly inelegant wording starting with a conjunction, which was certainly not allowed when I did English language O-level many years ago.

Chris Bryant: Dickens did it all the time.

Rob Marris: Dickens may have done, but he did not have an English O-level.
 In that subsection the Government are departing from 20 to 1, but what concerns me, as a non-practising solicitor, is that there appears to be no adjudication process built into the provision as to what happens if the Inland Revenue and the scheme administrator are unable to agree on a departure from 20 to a number greater than 20. It does not appear that the individual prospective pensioner, about whom the valuation would be made, has any say in the matter. I would like some clarification from the Minister on that.

Ruth Kelly: First, I will deal with some of the other points made in the debate on the amendment which are more relevant to the stand part debate. Let me return to the hon. Member for Tatton's contention that we should somehow depart from the 20 to 1 valuation factor. He points to the quote from Edward Troup, a fine man who has recently been hired by the Treasury rather than the Inland Revenue, I believe, to add his considerable expertise to our deliberations. It is true that we have integrated private sector secondees into the pension simplification team over the last few years when looking at this sort of question, and they are convinced, as are we, that 20 to 1 is the right valuation factor to use. We do not want to introduce extra complications for the pension providers by departing from that simple factor. I do not want to re-run the debate that we have had in previous sittings, but the move away from our original proposals to the
 20 to 1 factor has been widely welcomed throughout the pensions industry, although I know that the hon. Gentleman's colleague has a different view as, I am sure, do some other hon. Members. However, in general, the proposals have been widely welcomed.

George Osborne: The Financial Secretary skirted over the point about Edward Troup, who is a fine man. He was a special adviser to the last Conservative Chancellor and I am delighted that he is now advising the Government. He said:
''The current proposed method of valuation carries a risk of inequities and inappropriate incentives being created between money purchase and defined benefits schemes.''
 That is in a public document that he submitted to the Treasury Committee. Does the Financial Secretary agree with her Treasury official?

Ruth Kelly: Mr. Troup was certainly not a Treasury official, and if he expressed those views, I am sure that he has been persuaded by his colleagues in the Treasury since he joined them. Mine is the right valuation factor.
 We have highly experienced representatives of the pension industry on the simplification team and they are firmly of the view that 20 to 1 is the right valuation factor to use. It is the most simple and accurate method available and they recommended it.

Howard Flight: May I follow up the point raised by the hon. Member for Wolverhampton, South-West? Subsection (2) says to me that it would empower the Revenue and the administrator to say that people retiring at 55 in a defined benefit scheme should have a 25 to 1 factor applied. What does it mean if not just that?

Ruth Kelly: I shall come to that in a moment after addressing the point made by my hon. Friend the Member for Wolverhampton, South-West.
 Should we apply a lower factor to, for example, older people such as the hon. Member for Arundel and South Downs, who, if I dare say so, has a keen personal interest in these issues?

John McWilliam: Order. Does not the Minister think that I have?

Ruth Kelly: I have already explained to the Committee how it is possible for individuals to switch between DB and DC schemes to suit their personal circumstances, but we are not prepared to over-complicate the system to assist the tax planning of a very small minority of people who have pensions at or around the level of the lifetime allowance. A lower factor of, for example, 15 to 1 for people to take their pensions late would encourage them to use registered pension schemes not to provide a pension but merely as a tax-free savings vehicle for as long as possible. That is all very well for those who do not need to crystallise their funds at the usual age, but it would complicate the system for the vast majority of people.
 The hon. Member for Tatton made the case that 20 to 1 favours people who take their pensions at 50 compared with 75. We are merely replicating the 
 system that was introduced by his party in 1989 under which individuals were able to draw up to £70,000 whether at the age of 50 or 75. We are merely replicating the previous regime.

Rob Marris: Is my hon. Friend aware that in personal injury law, which I have practised for many years, a series of actuarial tables known as the Ogden tables set out the multipliers to be used for loss of earnings? If a 35-year-old man, for example, earning a certain amount net each year were sufficiently seriously injured never to be able to work again, the tables show what the multiplier should be. They cover people in such circumstances, who are, I strongly suspect, far fewer than the number of people who retire each year.

Ruth Kelly: My hon. Friend makes an interesting point, but he will agree that we should design the system to benefit as many people as possible rather than complicate it just to assist tax planning for a few individuals.
 To return to the previous point made by my hon. Friend and the hon. Member for Arundel and South Downs, a higher factor would apply only when both the scheme and the Revenue agreed to it. If there were no such agreement and the scheme rules did not fall within the parameters assumed by the factor of 20, when increases in pensions in excess of inflation of 5 per cent. occurred, scheme members would be subject to the benefit crystallisation event rule. There would be no advantage for schemes or individuals in not negotiating a higher valuation factor were that to be appropriate. I think I have covered the points raised, and I therefore urge the Committee to agree to the clause. 
 Question put and agreed to. 
 Clause 263 ordered to stand part of the Bill. 
 Clause 264 ordered to stand part of the Bill.

Clause 265 - Other definitions

Question proposed, That the clause stand part of the Bill.

George Osborne: I could not let the clause go unremarked because it is difficult to imagine a more seemingly innocuous clause in any legislation having a more profound effect. On the bottom of page 214, in line 43, it states that
'' 'normal minimum pension age' means—
(a) before 6 April 2010, 50, and
(b) on and after that date, 55''.
 That is extraordinary. The clause is headed ''Other definitions'', and most of the definitions are of fairly straightforward terms, such as the Board of Inland Revenue, the tax year and the retail prices index. It is the sort of thing you find in Finance Bills, as you will know from your experience, Mr. McWilliam, where mop-up clauses are included at this point in the proceedings. However, the Government are changing the minimum pension age from 50 to 55 in the clause by simply changing a definition. That is a profound change that will affect millions of people every year. I 
 point it out because it would be extraordinary if the Committee had not at least paused to consider such a big change in working practice. 
 Of course, the Government consulted on the matter as part of what they rather euphemistically called ''flexible retirement''. Their idea of flexible retirement is to increase the minimum pension age. The Financial Secretary talked earlier about giving people the opportunity of working longer by increasing the age at which they could retire. I do not disagree with the decision, but I shall ask her to comment on a couple of issues. 
 First, why have the Government decided not to use the tax rules to phase in the new minimum retirement age? Of course, it is up to schemes how they do that, which is made quite clear in the consultation. However, the December 2002 consultation paper asked for further consultation on using the tax rules to achieve that as well as how schemes might go about it. It is perfectly possible that that might be included in the Bill so that, for example, the minimum retirement age would be 50 in 2010, 51 in 2011, 52 in 2012 and so on. That would avoid the cliff edge whereby a person born on 6 April 1960 could not take a pension at the age of 50 but would have to wait five years longer to retire than someone born the day before.

Rob Marris: I was born on 8 April.

George Osborne: My poor friend—the hon. Gentleman has felt like a friend during the last two weeks—says that he was born on 8 April 1960.

Rob Marris: I did not say it was 1960.

George Osborne: The hon. Gentleman was merely telling us his birthday, in which case it is a less interesting point.
 A person born on 6 April 1960 will not be allowed to retire at 50, unlike a person born the day before. That has created quite a cliff edge. As I said, there are other ways of making the change; for instance, the Government could have phased it in over a period of years. I will be interested to hear an explanation from the Financial Secretary since the change will affect many people, and they will feel that they have been unfairly treated. 
 The Government have also said that people can keep a contractual right to retire at 50 in an occupational scheme. However, that will not apply to people with personal pensions. Some people will have paid higher contributions in order to retire at 50, but will not be able to do so, even though they have paid for the privilege, because it is not a contractual right. Is that another example of one rule for defined benefit schemes and a less generous rule for defined contribution schemes? Does the Financial Secretary have any idea how many people who have defined contribution schemes were planning to retire at 50 and have paid higher contributions to be allowed to do so? 
 The Bill contains a provision that allows people from certain professions, such as footballers, to retire early. Perhaps the entire England football team will have to retire in a couple of hours if they do not perform. [Hon. Members: ''Oh!''] I am sure that they 
 will perform—I say that not least because half of them are my constituents. I wish them well. It is sensible to allow people in certain professions—I think the Government have cited ballet dancers as an example—to retire early. 
 However, what provision is there for the public sector? There are certain jobs in the public sector in which it is pretty normal for people to retire before the age of 55. I think that the average retirement age in the police is below 55. Do the Government envisage that that will continue even after the increase? Does the retirement age apply to everyone, including workers in the public sector? If so, what impact will that have on the Exchequer and on public pay and recruitment policies over the next few years? What impact will it have on the police and the Army? This is a major change. I am not against it, but it is important that the Government set out their position.

Rob Marris: Perhaps surprisingly, I want to echo some of the comments made by the hon. Gentleman. I have had letters from constituents, particularly teachers, who are very concerned about the change, and I suspect that other hon. Members have, too. I would be interested to hear the Financial Secretary's explanation not for the change per se, but for having a cliff edge, as the hon. Gentleman described it, rather than the kind of phasing that we have moved towards for other retirement ages. It seems difficult that someone born a couple of days apart from someone else would face a five-year cliff edge—that is the way I read the clause.

Ruth Kelly: I must admit that I was not expecting a debate about the normal pension age under this clause, which deals with other definitions. We will have a full debate next week about the transitional arrangements that will apply to members of different pension schemes. That will include the opportunity to debate the footballers' pension scheme and the transitional arrangements that will apply to the police, the armed forces and the fire service. However, I am happy to touch on some of those points now.
 As the hon. Member for Tatton knows, the increase in the normal pension age from 50 to 55 is an integral part of our simplification reform. It is part of the policy agenda put forward and advocated by the Department for Work and Pensions to encourage active ageing—rather than ageing actively—and to push up the distribution of ages at which people retire, so that on average people can stay in the work force longer. As he knows, and as I am sure my hon. Friends know, we have a real problem in this country with people being forced out of the labour market when they are over the age of 50—and in some cases even earlier—or finding it difficult to stay on after that age. That is why we have introduced the new deal for older people. This tax reform fits in neatly with our overall agenda of encouraging people to stay longer in the work force. 
 The reform is part of a package that facilitates flexible retirement for the first time. If people want to stay in the work force beyond the age of 55, they can now do so on a part-time basis, while drawing down a pension to supplement their income. The Treasury has been considering that idea for many years, but it has 
 not proved possible to come up with a scheme to accommodate it. We have now been able to produce a package that does that, obviously taking the overall cost to the Exchequer into account. The increase in the minimum normal pension age is essential to allow us to bring in flexible retirement. I hope the hon. Gentleman would agree that that is a useful and essential reform. 
 We had a choice as to how to bring in the reform. We were aware of the human rights implications and how people would adjust. We carefully considered whether to bring it in at a specified date, or whether we should allow schemes to choose when to bring it in to suit their members and indeed to reflect their members' demographic make-up. We put out that precise question for consultation. The consultation document asked for views on whether it should be left to schemes to decide, or whether the Government should prescribe a phased introduction between A day—the date we turn on the pension simplification—and 2010. The document also asked for views on the need for special transitional rules for people who have already built up rights to a pension before the age of 55 in existing schemes. I intend to deal with the relevant clauses when we debate the transitional provisions next week. 
 The response to the consultation was mixed. Some respondents agreed that schemes ought to be allowed to phase in the changes. Others argued that the Government should prescribe them. On the whole, we thought that there was more force to the argument that the schemes should be allowed to bring in the changes in a way that suited their members best, which is why we decided to introduce the changes as we did. That is an integral part of our reform.

George Osborne: Can the Financial Secretary say what the big public sector schemes are likely to do? Are they likely to phase in the changes, or will there be a single day when suddenly, come 2010, someone born on 5 April 1960 can retire, but someone born on 6 April 1960 will have to wait another 5 years? Many of the defined benefit schemes are in the public sector. Perhaps she could explain what the Government, who are the biggest employer in the country, are going to do.

John McWilliam: Order. There are times when I wish I had been born in 1960, but unfortunately it was a bit before that.

Ruth Kelly: As the hon. Gentleman knows, my right hon. Friend the Chief Secretary is carrying out negotiations with other Government Departments about reform in respect of the armed forces, the police and the fire service. That has been deliberately left out of the current proposals because there are special factors, including the tradition—and in certain circumstances, the necessity—of some members of those schemes taking early retirement. He will understand that that is the right way to deal with that issue.

George Osborne: The Financial Secretary seems to be suggesting that the public sector will look at the
 tradition of policemen retiring early and so on, and take that all into account. What about those in private sector occupations where there is a tradition of retiring early?

James Purnell: Tory MPs.

George Osborne: Well, there are going to be a lot of Labour MPs retiring in the next few years, and it is going to be of interest to them as well. Is there going to be a special consideration for those in the public sector?

Ruth Kelly: Yes. I believe the Opposition have been sent the draft regulations on public sector schemes, which suggest that we preserve early retirement ages in certain circumstances, and I suggest that the hon. Gentleman looks at them.
 The hon. Gentleman draws attention to the tradition of early retirement ages in the private sector. We will probably re-run this debate on Tuesday, when we come to discuss the transitional provisions. Certain representations have been made to me and to Treasury and Inland Revenue officials that certain professions would have liked to see themselves being carved out and treated differently, for a variety of reasons. We are considering each case on its merits to decide whether there is an objective justification for special treatment.

George Osborne: Will the Financial Secretary at least give me an assurance that, in respect of the normal minimum retirement age, the Government will not treat public sector employees any differently from private sector employees? I think that private sector employees would be outraged if they were forced to work longer, while the privileges of the public sector were protected.

Ruth Kelly: Given his involvement in all areas of pensions across Government, the hon. Gentleman should know that public sector schemes have begun to move in the direction of age 55. We have been in negotiations with public sector schemes for a number of months, if not years, to arrive at sensible solutions that command the support of both our vital public services and the Government's policy agenda.
 It is a different situation for private sector schemes. Certain private sector schemes have a tradition of early retirement. Perhaps it would be better to say that they have a tradition of an early cessation of a particular occupation, before people move into a different occupation. 
 Footballers fall into that category. I had strong representations on behalf of his members from Gordon Taylor of the Professional Footballers Association. We are considering the points that he made and investigating whether there is a way to accommodate his concerns in the pensions regime. I suspect that that will prove difficult. We are also looking outside the pensions regime to see whether the Professional Footballers Association, for example, might be able to continue its highly redistributive pension scheme without the tax reliefs associated with pensions, which tend to benefit footballers about the age of 35. The same considerations apply to other sporting professionals, members of Equity, ballet 
 dancers, deep-sea divers and so on, all of whom have early normal pension ages.

Quentin Davies: The hon. Lady says that she would like to continue the discussion about transitional arrangements for specific occupations on Tuesday. That is fine, but it may, under your stern chairmanship, Mr. McWilliam, be difficult to carry forward to Tuesday the issue of the cut-off that will take place in the year 2010 and the falling-off-the-cliff effect—the fact that, on one day, people will be allowed to retire at 50 and someone who was born a day later will not be able to retire for another five years.
 Will the hon. Lady be able to address that point this afternoon and tell us whether there might be any flexibility in the Government's attitude on that point? I think that a genuine anomaly is being created and that it may not have been created on purpose.

John McWilliam: Order. That was more a point of order. What we are coming on to is specific and I would not rule out this afternoon's debate having any effect on the issue on Tuesday. I am also conscious that we are talking about 2010. It is 2004 and my sums tell me that 2010 is six Finance Bills away.

Ruth Kelly: Mr. McWilliam, you make an excellent point. There is a considerable time before 2010. We consulted on the best way to bring in the provisions. Those we consulted suggested allowing schemes maximum flexibility. As the hon. Member for Tatton said, there was a mixed response, but there was significant support for the position that we took. It was not the case that more were in favour of the prescribed approach, which was the alternative. I suspect that the debate will continue at length on Tuesday. I commend the clause to the Committee.
 Question put and agreed to. 
 Clause 265 ordered to stand part of the Bill.

John McWilliam: For the record, I am going to retire at the next election, so that is six Finance Bills that I will not be chairing.Clause 266 Abbreviations and general index

Clause 266 - Abbreviations and general index

Amendments made: No. 326, in 
clause 266, page 215, line 32, at end insert— 
 ' ''NIA 1965'' means the National Insurance Act 1965 (c.51), 
 ''NIA(NI) 1966'' means the National Insurance Act (Northern Ireland) 1966 (c.6 (N.I.)),'.
 No. 327, in 
clause 266, page 215, line 35, at end insert— 
 ' ''SSCBA 1992'' means the Social Security Contributions and Benefits Act 1992 (c.4), 
 ''SSCB(NI)A 1992'' means the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c.7),'.—
 No. 328, in 
clause 266, page 216, line 11, leave out 'the individual's' and insert 'a person's'.—
 No. 329, in 
clause 266, page 217, leave out line 16.—
 No. 330, in 
clause 266, page 217, line 21, at end insert— 
 'lifetime allowance (in relation to a person) 
 section 207'.
 — 
 No. 473, in 
clause 266, page 219, line 30, at end insert— 
 'unauthorised payments charge 
 section 197(1)'.
 — 
 No. 474, in 
clause 266, page 219, line 35, at end insert— 
 'valuation assumptions (in relation to a person) 
 section (Valuation assumptions)'. —[Ruth Kelly.]
 Clause 266, as amended, ordered to stand part of the Bill.

Clause 267 - Minor and consequential amendments

Amendment made: No. 475, in 
clause 267, page 220, line 10, leave out from 'revocations)' to end of line 11 and insert 
 'as may appear appropriate in consequence of, or otherwise in connection with, this Part— 
 (a) in any enactment contained in an Act passed before 6th April 2006 or in the Session in which that date falls, and 
 (b) in any instrument made before that date or in the Session in which that date falls.'.—[Ruth Kelly.]
 Clause 267, as amended, ordered to stand part of the Bill.

Schedule 33 - Pension schemes etc: minor and consequential amendments

Amendments made: No. 476, in 
schedule 33, page 458, line 7, after 'paragraph' insert 'do'.—
 No. 477, in 
schedule 33, page 458, line 9, after 'applies' insert 'does'.—[Ruth Kelly.]
 Schedule 33, as amended, agreed to. 
 Clause 268 ordered to stand part of the Bill. 
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at twenty-eight minutes to Five o'clock till Tuesday 22 June at half-past Nine o'clock.